Housing Market Recovers Though Economy Lags Behind

Robert Siegel talks with Adam Davidson from Planet Money team about this week's cluster of positive data on the health of the U.S. housing market. Davidson says the strength of the housing sector is now irrefutable, even though a broader economic recovery is still years away.

For years now, economists - not to mention the rest of us - have been waiting for the news that we got this week. It now seems clear the housing market has turned around and is rising steadily. The collapse of housing led to the financial crisis and the persistent economic doldrums we're in. And a healthy housing market has long been seen as a crucial step towards a fuller recovery.

Well, Adam Davidson of NPR's Planet Money team joins us now to discuss whether this means our economy overall is on a verge of healthy growth. Hi, Adam.

ADAM DAVIDSON, BYLINE: Hi, Robert.

SIEGEL: And, first of all, what was so great about the news this week?

DAVIDSON: Well, we just got a whole bunch of pieces of news, all of which pointed in the same direction. So a couple of days ago, we learned that existing home sales, people selling the home they already live in, those reached a three-and-a-half-year high. New home sales, that was at the highest it's been since the financial crisis was upon us, and prices were pretty close to record highs as well. And economists particularly like seeing new home sales because it's someone really betting on the future, and that's a really good sign.

So we've been hearing good news out of the housing market for months now, but this was a week where everything was pointing in the same direction, everything was better than expected, and it just made us realize, OK, now we can say it: The housing market's recovering.

SIEGEL: And in the context of the economy as a whole, why is the housing recovery so important?

DAVIDSON: When I picture the whole U.S. economy, all the economic activity, I picture it sitting on the housing market, metaphorically. You know, of course, for any family, the biggest thing they own, if they own a home, is their home. If they're still paying it off, it's also the biggest debt they have.

And so when housing goes up, when prices go up, when people see their neighbors selling their home, even if they have no intention of selling, they feel richer. They're more likely to spend money. At the same time, our banks, since they're extremely exposed to housing, they feel better. They lend more money. It fuels almost all other economic activity.

SIEGEL: And, of course, new home construction means lots more jobs in construction. But the whole economy overall doesn't seem to be doing all that well.

DAVIDSON: No, certainly not. Unemployment is still way too high, and there's actually evidence that this quarter of the economy is actually slowing down rather than speeding up. And even within housing, there's also bad news along with the good news. I mean, yes, we are at five-year highs, but we're still well below the average from before the financial crisis.

We know that there are millions of people living in homes that are too small, living with their parents or roommates who really want to buy a home and either can't afford it or just too nervous. So, yes, we fell very deeply into a hole because of the housing crisis and the financial crisis. We're nowhere near the top of the hole, but we are scrambling up the side now, and we can sort of see light way up there.

SIEGEL: Well, to climb out of the hole, what needs to happen to get us all the way back to a truly healthy economy?

DAVIDSON: Well, one thing we don't need are the sequester cuts. A few months ago, there was some controversy, but now it's pretty clear that the sequester cuts are hurting the economy, slowing the economy down. And, in fact, I'd say most economists, although certainly not all economists, would agree that the government should be spending more money, not less.

Instead, without government action, it's just going to take a lot of time. Sort of the best-case scenario is people continue slowly to buy homes. Companies look at that buying and feel a little bit more confident that people will buy refrigerators and TVs and take vacations. And so they start hiring people. They start investing in new businesses. That creates a positive feedback. There's more hiring, which means more confidence, more home buying, more investment, et cetera, et cetera.

SIEGEL: Well, if 2013 marks the return of the healthy housing market, when do you think we'll have a conversation about the return of the healthy economy overall?

DAVIDSON: My best guess - I mean, if we have it in 2015, that would be pretty great news. 2016 seems more realistic. But I don't want to downplay this week. This is big. We really needed housing to come back before we could even start being optimistic about 2016. So now we can be, and that is good news.

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